Taxing matters: Supreme Court gives judgment in case of unjust enrichment
The Commissioners for HMRC V Investment Trust Companies (in liquidation) [11.04.17]
A successful appeal by Her Majesty’s Revenue and Customs (HMRC) is expected to have a significant impact on unjust enrichment actions brought by a claimant against a defendant to which it has not directly provided a benefit.
It is well established that restitutionary remedies are available where a defendant has been unjustly enriched at the expense of a claimant. Broadly, the obligation to make restitution can arise where a special relationship exists between two parties and the law imposes a duty on one to pay a sum of money to the other.
The relationship between HMRC and a customer which paid VAT to a third party supplier has recently been considered by the Supreme Court.
In the long-awaited judgment of The Commissioners for HMRC v Investment Trust Companies (in Liquidation) [11.04.17], the Supreme Court allowed an appeal by HMRC, with the result that a customer which mistakenly paid VAT to a supplier — which in turn accounted for it to HMRC — did not have a claim for unjust enrichment to recover it directly from HMRC.
Investment Trust Companies (ITC) — a number of close-ended investment funds — sought refunds of VAT paid with respect to the supply of services by investment managers (the Managers) once it transpired the VAT was not due under EU law.
The Managers who received VAT from ITC paid it to HMRC, believing they were entitled to deduct input tax (the tax chargeable in respect of taxable supplies which they had received for the purpose of their business of making taxable supplies) from the output tax (the tax chargeable in respect of their taxable supplies).
The case was considered by reference to a notional VAT figure of £100 received by the Managers from ITC for taxable services before it transpired that the supplies were VAT exempt.
Where the input tax exceeded the output tax, the Managers would be entitled to a credit from HMRC. Where the output tax exceeded the input tax, the Managers would be required to pay the surplus to HMRC but could retain the balance. So, if the Managers provided taxable services on which the VAT chargeable was £100, the Managers were bound to account to HMRC for £100. If the Managers had themselves purchased taxable services on which the VAT was £25 — thereby incurring an input tax — the Managers were entitled to deduct that £25, and were required to pay HMRC only the balance of £75.
Once it became apparent that the services provided by the Managers were VAT exempt, the Managers made claims to HMRC for refunds under s.80 of the VAT Act 1994 and passed on the refunded VAT to ITC. However, under the 1994 Act, the Managers were only entitled to a refund of the VAT they had actually paid HMRC, i.e. the notional £75. As ITC did not receive the full amount of VAT they had been mistakenly charged, they brought proceedings against HMRC seeking remedies in unjust enrichment in respect of the notional £25.
The Court of Appeal held that the judge at first instance had been right to conclude that ITC had a direct cause of action in unjust enrichment against HMRC for VAT paid under a mistake of law. It also determined that HMRC could have been enriched by up to the notional £75 (where such claims were not time-barred) and that ITC’s claim regarding the notional £25 lay against the Managers. Both sides appealed.
Supreme Court’s judgment
The Supreme Court unanimously allowed HMRC’s appeal, holding that ITC did not have a common law claim against HMRC for unjust enrichment.
ITC’s payment to the Managers was deemed part of the Managers’ general assets and the Managers’ VAT liability to HMRC arose independently of whether ITC actually paid VAT.
It was only from the Managers — to whom the VAT was directly paid — that ITC could recover the money in an unjust enrichment claim.
As ITC had not paid any VAT to HMRC directly but had ultimately incurred the expense of unnecessary VAT, the judgment considered the requirement for claims of unjust enrichment that the enrichment sought by the claimant be “at the expense” of the claimant. In that regard, the Supreme Court rejected concepts of underlying economic or commercial reality on grounds of vagueness which had persuaded the Court of Appeal.
The decision is expected to restrict the circumstances in which a claimant may have a cause of action in unjust enrichment against a party upon which it has not directly provided a benefit.
From an insurers’ perspective, this case illustrates the kind of complex issues that can arise in claims of unjust enrichment, which may impact the response of D&O/professional indemnity cover available to an insured in respect of such actions.
More generally — in assessing the appropriate response of the policy to claims for unjust enrichment — it remains appropriate to assess to what extent, if at all, cover is available for an adverse award if the insured is deemed to have been unjustly enriched. If an adverse award is restitutionary in nature, rather than compensatory — depending on the scope of cover available — it might be legitimate to say that the insured has not suffered a loss.
Further — depending on how an insured came to be unjustly enriched — coverage defences based on excluded perils relating to the conduct of the insured (e.g. dishonesty, unlawful profit), as well as public policy, may be available.